Dow, up 166 . . . S&P, up 23 . . . NASDAQ, up 59

View full sizeStocks are rallying in the final hours of trading for the year as a budget deal takes shape in Washington.Associated Press file

NEW YORK -- The stock market shot higher on Monday
even as the "fiscal cliff" neared. By the time trading ended,
Republicans and Democrats still hadn't reached a budget compromise -- but
investors were betting that they would.

It was a dramatic day on
what turned out to be a strong year for stocks. The Standard &
Poor's 500 index rose 13.4 percent for the year, after finishing flat in
2011. It was the index's best year since 2009. The gains came despite a
flare-up in Europe's debt crisis and anemic U.S. growth, bringing U.S.
indexes close to their highs reached before the 2008 financial crisis.

The
close Monday was a high note in what had been a choppy day for the
market, as choppy as the "fiscal cliff" deal-making that has been
yanking it around. It also marked a turnaround after five straight days
of "cliff"-influenced losses. The Dow Jones industrial average and the
Standard & Poor's 500 both climbed more than 1 percent. The Nasdaq
composite index rose 2 percent.

Stocks fell at the opening of
trading Monday and struggled for direction throughout the morning. The
indecisiveness overlaid a day of dramatic budget negotiations in
Washington, where lawmakers were trying to hammer out a new budget deal
to avert the "fiscal cliff." That refers to automatic tax increases and
government spending cuts that will kick in without a budget deal.

Stocks
jerked higher at midday following reports that the bare outline of a
deal to avoid the "cliff" had been knit together. The gains faded after
President Barack Obama said in the early afternoon that a compromise was
"within sight," but not finalized. Then, in the late afternoon, the
indexes shot higher again. Congressional Republicans and the Democratic
White House said they had agreed on some measures, but still had no
final deal in hand.

At the close of trading, Dow Jones industrial
average was up 166.03 points, finishing the year at 13,104.14. That's a
gain of 7.3 percent for the year, its fourth straight year of gains.

The
S&P 500 rose 23.76 to 1,426.19. The Nasdaq composite climbed 59.20
to 3,019.51. For the year the Nasdaq rose 15.9 percent.

With the
"fiscal cliff" still closing in, investors' opinions about its potential
impact varied, making its long-term effect on the market hard to guess.

Some
investors are unruffled. They think that even if the U.S. does go over
the "cliff," it would be more akin to the anti-climactic Y2K scare than a
true Armageddon. The "cliff's" impact would be felt only gradually,
they reason. For example, workers might get more taxes withheld from
their first couple of paychecks in the new year, but it's not as if
they'd have to pay all their higher taxes up front on Tuesday. And
Congress could always retroactively repeal those higher taxes.

Others
are more concerned. The higher taxes and lower government spending
could take more than $600 billion out of the U.S. economy and send it
back into recession. Investors would have no good read on the country's
long-term policy for taxes and spending.

The psychological impact -- the U.S. would essentially be broadcasting that its lawmakers can't compromise -- would also hurt.

"We're
having a fragile recovery, with the pain of 2008 still fresh on
everybody's mind," said Joe Heider, principal at Rehmann Group outside
Cleveland. "It's fear of the unknown. And fear is one of the greatest
drivers of the financial markets."

Tim Speiss, partner in charge
of the personal wealth advisers practice at EisnerAmper in New York,
followed the "cliff" negotiations on Monday and wondered if the U.S.
would get its debt rating cut again. The Standard & Poor's ratings
agency cut its rating of the U.S. government amid similar negotiations
in August 2011, when lawmakers were arguing over the government's
borrowing limit. S&P said at the time that the "political
brinksmanship" highlighted how "America's governance and policymaking
(is) becoming less stable, less effective, and less predictable." Its
rating cut sent the stock market into a tailspin.

The other major
ratings agencies, Moody's and Fitch, have suggested that they might
lower their ratings of the U.S. because of the "fiscal cliff."

"That is, unfortunately, the big story," Speiss said.

It's
also one of the only stories. There's been little other news to trade
on during the holiday season, giving the "fiscal cliff" drama outsized
influence. No major companies are scheduled to report earnings this
week. The most significant economic indicator scheduled for this week,
the government's monthly jobs report, won't be released until Friday.

The
yield on the benchmark 10-year Treasury note rose to 1.76 percent from
1.70 percent late Friday, a sign that investors were moving money into
stocks.

Some of the best-performing stocks for the year were those
that were making up for deep losses in 2011. Homebuilder PulteGroup
nearly tripled after falling for five of the previous six years.
Appliance maker Whirlpool and Bank of America more than doubled over the
year, after falling by double-digit percentages in 2011.

Some of
the worst performers of 2012 were Best Buy, Hewlett-Packard and J.C.
Penney. All are struggling to keep up with competitors who have adapted
more quickly to changing technologies and customer tastes. They were all
up for the day, but were all down at least 44 percent for the year.

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